US 10-year yields immediately gapped lower to below 2.74% before stabilising

By Kymberly Martin

It was another fairly quiet day in NZ fixed interest markets ahead of the key event for the week, the US FOMC meeting and today’s NZ Q2 GDP release. 2-year swap closed unchanged at 3.56%.

Yields further out the curve closed up 2bps.

Short-end yields seem to have reached levels where they are attracting some receiving interest. That said, the market appears quite easily able to absorb this.

Natural pay-side demand from the ‘real economy’ looking to hedge future rate risk continues.

Despite another quiet day in NZ bonds, yields pushed higher by 5bps across the curve. NZ 10-year bond yields closed at 4.65%, a new high since Aug 2011.

But the real event of the past 24-hours has been the US FOMC announcement early this morning. The US Fed surprised the market by announcing no change to its asset purchases. i.e no ‘tapering’. It will continue to buy $40b of MBS and $45b of Treasuries in September.

The market’s response was abrupt. US 10-year yields gapped from 2.86% to below 2.74% before stabilising around this level ahead of Chairman Bernanke’s Press Conference. Post the conference yields fell further to around 2.70%.

We will see NZ yields lower on the open today. The shift lower may be compounded by a soft Q2 GDP print we expect later this morning. We anticipate a -0.2%q/q outcome relative to consensus expectations at +0.2%.